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Studying the effect of Money illusion on Housing market in Iran: Seemingly Unrelated Regression Equation (SURE) approach
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Mohammadreza Monjazeb *  , Hossein Amiri , Mehrafarin Matinfard |
| kharazmi unv. , dr_monjazeb@yahoo.com |
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Abstract: (11 Views) |
Objective: The housing market is one of the most important sectors of the economy, exerting substantial effects on economic growth, investment, employment, and household welfare while also serving as a key channel through which monetary and fiscal policies influence the real economy. Under inflationary conditions, economic agents may suffer from money illusion, whereby decisions are based on nominal rather than real values. Such behavior can distort asset pricing, particularly in the housing market, and reduce the effectiveness of macroeconomic policies. Accordingly, this study aims to investigate the existence of money illusion in Iran's housing market and to examine the effects of major macroeconomic variables on housing prices using the Seemingly Unrelated Regression (SUR) approach.
Materials and Methods: This study employs annual data for the Iranian economy covering the period 1971–2021. To jointly model the relationship between housing prices and inflation, a system of Seemingly Unrelated Regression (SURE) equations is estimated. This framework accounts for the contemporaneous correlation between the error terms of the housing price and inflation equations, thereby improving estimation efficiency and allowing for the identification of both direct and indirect effects of macroeconomic variables. The main variables include the housing price index, inflation rate, exchange rate, government budget deficit, and private investment in the housing sector.
Results: The estimation results indicate that the first lag of inflation has a positive and statistically significant effect on housing prices, providing empirical evidence in support of first-degree money illusion in Iran's housing market. The findings further reveal that exchange rate growth and the government budget deficit significantly affect inflation and indirectly influence housing prices. In contrast, private investment in the housing sector does not have a statistically significant effect on housing prices. Moreover, the Breusch–Pagan test confirms the appropriateness of the SURE methodology by indicating significant contemporaneous correlation between the equations.
Conclusion: The findings suggest that a considerable proportion of housing price fluctuations in Iran can be attributed to money illusion and the tendency of economic agents to rely on nominal rather than real values in their decision-making process. Therefore, maintaining price stability through inflation control, reducing exchange rate volatility, strengthening fiscal discipline, and improving the transparency of economic information can help mitigate cognitive biases, enhance price formation in the housing market, and improve the effectiveness of macroeconomic policies. |
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| Keywords: Housing prices, Money illusion, Inflation, Seemingly Unrelated regression equations (SURE) model |
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Type of Study: Research |
Subject:
سکونتگاههای شهری و روستایی
Received: 2024/09/27 | Accepted: 2026/09/23
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